January 2018 saw the introduction of the second Payment Services Directive (PSD2): a new regulation that forces the biggest banks in the UK to give customers the key to their financial data. Established to accelerate the shift towards ‘Open Banking’, these package of reforms imposed by the CMA put customers in the driving seat, allowing them to control which third parties gain access to information such as spending habits, regular payments and preferred companies.
In turn, providers of cutting-edge budgeting apps and online financial platforms are able to harness this data to enable innovation in financial services and improve the customer experience – providing they have permission. Central to the CMA’s regulatory reform has been to ensure customers can fully benefit from the digital transformation that has swept the sector while enabling smaller firms and new entrants to compete more fairly.
Almost a year on since the introduction of PSD2, what changes have been felt in the industry?
In response to the advent of open banking, Amazon commenced talks with American banks such as JP Morgan Chase to create a digital checking account for young people and those without a current account. Their aim? To make banking more accessible and offer retailers the option of Amazon Pay as part of the checkout process. Naturally, expectations have been high since Amazon began flexing their muscles in the finance space, and big banks have woken up to the threat they pose in the future – but the challenge won’t diminish through avoidance.
According to a report from Bain & Co, about two-thirds of Amazon Prime members said they would gladly try a free online banking service from the e-commerce giant. Perhaps unsurprisingly, conventional banks are rising to the challenge – in the words of Gerard du Toit, partner of Bain & Co, they’re focused on “Amazon-proofing” their businesses because they recognise the potential that companies such as these can have in cornering the market and setting customer expectations.
For banks willing to embrace change, the opportunity that Open Banking and PSD2 provide are undeniable: by encouraging competition from tech giants, traditional providers will be forced to innovate their core services in order to enhance their customer experience and stay front of mind to those who have been loyal over the years.
So far, open banking has encouraged the creation of partnerships between conventional banks and plucky fintech start-ups, PwC reports. Until recently, agile market entrants posed a threat to high street banks; leaders of traditional firms feared their technology-led counterparts would far outpace them in market share.
According to their US Digital Transformation in Financial Services study, PwC reveals that incumbents are now recognising their own strengths, and start-ups are taking heed: in an industry well known for strict regulation, scalability is facilitated through strategic partnerships with well-established banks.
Already, open banking has forced high street banks to open up their data to third parties – as collaborations between both sides of the profession ramps up, customers are set to benefit from increasingly personalised services while banks and businesses can use sophisticated data to inform decisions about the services they build and sell. With all parties playing to their strength, the new open banking landscape now looks promising rather than threatening to leaders in the sector.
While open banking may prove successful in achieving its objective to encourage competition, it’s the action that traditional banks take today that will determine their sustainability in the face of digital and regulatory transformation. Already, forward-thinking providers are identifying areas of their operations in which there is room for improvement; they are eagerly making adjustments, striking partnerships and seeking ways to turn mundane activities into exciting experiences in order to keep their customers engaged.
For some, this means complete infrastructural change. For others, it means the exploration, experimentation and implementation of cutting-edge digital capabilities offered by fintech start-ups into their service offering. In any case, one thing is clear: the future of finance has arrived, bringing seamless customer experiences and driving competition from every corner of the market. How banks respond to this fast-moving landscape will make all the difference in their long-term success.
At OJO Solutions, we help organisations to implement technological solutions that meet their unique objectives. Should you need advice or support through digital transformation, get in touch with a member of the team today.